Long-Term Liabilities
14 – 21
a. $108,000.
b. $184,000.
c. $92,000.
d. $100,000.
Test Bank for Intermediate Accounting, Seventeenth Edition
14 – 22
81. At the beginning of 2020, Wallace Corporation issued 10% bonds with a face value of
$6,000,000. These bonds mature in the five years, and interest is paid semiannually on
June 30 and December 31. The bonds were sold for $5,558,400 to yield 12%. Wallace uses
a calendar-year reporting period. Using the effective-interest method of amortization, what
amount of interest expense should be reported for 2020? (Round your answer to the nearest
dollar.)
a. $688,320
b. $669,018
c. $667,000
d. $665,000
82. On January 1, Patterson Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate
of interest for these bonds is 10%. Interest is payable annually on December 31. Patterson
uses the effective-interest method of amortizing bond discount. At the end of the first year,
Patterson should report unamortized bond discount of
a. $274,500.
b. $285,500.
c. $258,050.
d. $255,000.
83. On January 1, Martinez Inc. issued $6,000,000, 11% bonds for $6,390,000. The market rate
of interest for these bonds is 10%. Interest is payable annually on December 31. Martinez
uses the effective-interest method of amortizing bond premium. At the end of the first year,
Martinez should report unamortized bond premium of:
a. $370,260
b. $369,000
c. $347,000
d. $330,000
84. At the beginning of 2020, Winston Corporation issued 10% bonds with a face value of
$4,000,000. These bonds mature in five years, and interest is paid semiannually on June 30
and December 31. The bonds were sold for $3,705,600 to yield 12%. Winston uses a
calendar-year reporting period. Using the effective-interest method of amortization, what
amount of interest expense should be reported for 2020? (Round your answer to the nearest
dollar.)
a. $443,334
b. $444,666
c. $446,012
d. $458,880
Long-Term Liabilities
14 – 23
85. Kant Corporation retires its $500,000 face value bonds at 102 on January 1, following the
payment of interest. The carrying value of the bonds at the redemption date is $481,250.
The entry to record the redemption will include a
a. credit of $18,750 to Loss on Bond Redemption.
b. credit of $18,750 to Discount on Bonds Payable.
c. debit of $28,750 to Gain on Bond Redemption.
d. debit of $10,000 to Premium on Bonds Payable.
86. Carr Corporation retires its $500,000 face value bonds at 105 on January 1, following the
payment of interest. The carrying value of the bonds at the redemption date is $518,725.
The entry to record the redemption will include a
a. credit of $18,725 to Loss on Bond Redemption.
b. debit of $18,725 to Premium on Bonds Payable.
c. credit of $6,275 to Gain on Bond Redemption.
d. debit of $25,000 to Premium on Bonds Payable.
87. At December 31, 2020 the following balances existed on the books of Foxworth Corporation:
Bonds Payable $6,000,000
Discount on Bonds Payable 840,000
Interest Payable 150,000
If the bonds are retired on January 1, 2021, at 102, what will Foxworth report as a loss on
redemption?
a. $1,110,000
b. $960,000
c. $810,000
d. $600,000
88. At December 31, 2020 the following balances existed on the books of Rentro Corporation:
Bonds Payable $7,000,000
Discount on Bonds Payable 980,000
Interest Payable 168,000
If the bonds are retired on January 1, 2021, at 102, what will Rentro report as a loss on
redemption?
a. $700,000
b. $945,000
c. $1,120,000
d. $1,288,000
Test Bank for Intermediate Accounting, Seventeenth Edition
14 – 24
89. The December 31, 2020, balance sheet of Hess Corporation includes the following items:
9% bonds payable due December 31, 2026 $5,000,000
Unamortized premium on bonds payable 135,000
The bonds were issued on December 31, 2016, at 103, with interest payable on July 1 and
December 31 of each year. Hess uses straight-line amortization. On March 1, 2021, Hess
retired $2,000,000 of these bonds at 98 plus accrued interest. What should Hess record as
a gain on retirement of these bonds? Ignore taxes.
a. $94,000.
b. $54,000.
c. $93,000.
d. $100,000.
90. On January 1, 2015, Hernandez Corporation issued $18,000,000 of 10% ten-year bonds at
103. The bonds are callable at the option of Hernandez at 105. Hernandez has recorded
amortization of the bond premium on the straight-line method (which was not materially
different from the effective-interest method).
On December 31, 2021, when the fair value of the bonds was 96, Hernandez repurchased
$4,000,000 of the bonds in the open market at 96. Hernandez has recorded interest and
amortization for 2021. Ignoring income taxes and assuming that the gain is material,
Hernandez should report this reacquisition as
a. a loss of $196,000.
b. a gain of $196,000.
c. a loss of $244,000.
d. a gain of $244,000.
91. The 10% bonds payable of Nixon Company had a net carrying amount of $2,850,000 on
December 31, 2020. The bonds, which had a face value of $3,000,000, were issued at a
discount to yield 12%. The amortization of the bond discount was recorded under the
effective-interest method. Interest was paid on January 1 and July 1 of each year. On
July 2, 2021, several years before their maturity, Nixon retired the bonds at 102. The interest
payment on July 1, 2018 was made as scheduled. What is the loss that Nixon should record
on the early retirement of the bonds on July 2, 2021? Ignore taxes.
a. $60,000.
b. $189,000.
c. $168,000.
d. $210,000.
Long-Term Liabilities
14 – 25
92. A corporation called an outstanding bond obligation four years before maturity. At that time
there was an unamortized discount of $1,500,000. To extinguish this debt, the company had
to pay a call premium of $500,000. Ignoring income tax considerations, how should these
amounts be treated for accounting purposes?
a. Amortize $2,000,000 over four years.
b. Charge $2,000,000 to a loss in the year of extinguishment.
c. Charge $500,000 to a loss in the year of extinguishment and amortize $1,500,000 over
four years.
d. Either amortize $1,000,000 over four years or charge $1,000,000 to a loss immediately,
whichever management selects.
93. The 12% bonds payable of Nyman Co. had a carrying amount of $4,160,000 on
December 31, 2020. The bonds, which had a face value of $4,000,000, were issued at a
premium to yield 10%. Nyman uses the effective-interest method of amortization. Interest is
paid on June 30 and December 31. On June 30, 2021, several years before their maturity,
Nyman retired the bonds at 104 plus accrued interest. The loss on retirement, ignoring taxes,
is
a. $0.
b. $32,000.
c. $49,600.
d. $160,000.
94. Didde Company issues $25,000,000 face value of bonds at 96 on January 1, 2019. The
bonds are dated January 1, 2019, pay interest semiannually at 8% on June 30 and
December 31, and mature in 10 years. Straight-line amortization is used for discounts and
premiums. On September 1, 2022, $15,000,000 of the bonds are called at 102 plus accrued
interest. What loss would be recognized on the called bonds on September 1, 2022?
a. $1,500,000 loss
b. $680,000 loss
c. $900,000 loss
d. $1,133,750 loss
95. Cortez Company issues $6,000,000 face value of bonds at 96 on January 1, 2019. The
bonds are dated January 1, 2019, pay interest semiannually at 8% on June 30 and
December 31, and mature in 10 years. Straight-line amortization is used for discounts and
premiums. On September 1, 2022, $3,600,000 of the bonds are called at 102 plus accrued
interest. What gain or loss would be recognized on the called bonds on September 1, 2022?
a. $360,000 loss
b. $163,200 loss
c. $216,000 loss
d. $271,500 loss
Test Bank for Intermediate Accounting, Seventeenth Edition
14 – 26
96. On January 1, 2020, Ann Price loaned $187,825 to Joe Kiger. A zero-interest-bearing note
(face amount, $250,000) was exchanged solely for cash; no other rights or privileges were
exchanged. The note is to be repaid on December 31, 2022. The prevailing rate of interest
for a loan of this type is 10%. The present value of $250,000 at 10% for three years is
$187,825. What amount of interest income should Ms. Price recognize in 2020?
a. $18,783.
b. $25,000.
c. $75,000.
d. $56,350.
97. On January 1, 2021, Jacobs Company sold property to Dains Company which originally cost
Jacobs $2,660,000. There was no established exchange price for this property. Danis gave
Jacobs a $4,200,000 zero-interest-bearing note payable in three equal annual installments
of $1,400,000 with the first payment due December 31, 2021. The note has no ready
market. The prevailing rate of interest for a note of this type is 10%. The present value of a
$4,200,000 note payable in three equal annual installments of $1,400,000 at a 10% rate of
interest is $3,481,800. What is the amount of interest income that should be recognized by
Jacobs in 2021, using the effective-interest method?
a. $0.
b. $140,000.
c. $348,180.
d. $420,000.
98. On January 1, 2021, Crown Company sold property to Leary Company. There was no
established exchange price for the property, and Leary gave Crown a $5,000,000 zero–
interest-bearing note payable in 5 equal annual installments of $800,000, with the first
payment due December 31, 2021. The prevailing rate of interest for a note of this type is
9%. The present value of the note at 9% was $3,605,000 at January 1, 2021. What should
be the balance of the Discount on Notes Payable account on the books of Leary at
December 31, 2021 after adjusting entries are made, assuming that the effective-interest
method is used?
a. $0
b. $1,070,550
c. $1,116,000
d. $1,395,000
99. Putnam Company’s 2021 financial statements contain the following selected data:
Income taxes $40,000
Interest expense 25,000
Net income 60,000
Putnam’s times interest earned for 2021 is
a. 2.4 times
b. 3.4 times.
c. 4.0 times.
d. 5.0 times.
Long-Term Liabilities
14 – 27
100. In the recent year Hill Corporation had net income of $210,000, interest expense of $50,000,
and tax expense of $90,000. What was Hill Corporation’s times interest earned for the year?
a. 7.0
b. 6.0
c. 5.2
d. 4.2
101. In recent year Cey Corporation had net income of $750,000, interest expense of $150,000,
and a times interest earned ratio of 9. What was Cey Corporation’s income before taxes for
the year?
a. $1,000,000
b. $1,350,000
c. $1,200,000
d. None of these answers are correct.
102. The adjusted trial balance for Lifesaver Corp. at the end of the current year, 2021, contained
the following accounts.
5-year Bonds Payable 8% $3,000,000
Interest Payable 50,000
Premium on Bonds Payable 100,000
Notes Payable (3 months.) 40,000
Notes Payable (5 yr.) 165,000
Mortgage Payable ($15,000 due currently) 200,000
Salaries and Wages Payable 18,000
Income Taxes Payable (due 3/15 of 2022) 25,000
The total long-term liabilities reported on the balance sheet are
a. $3,365,000.
b. $3,350,000.
c. $3,465,000.
d. $3,450,000.
On December 31, 2018, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is a
$3,000,000 note with $300,000 accrued interest payable to Piper, Inc. Piper agrees to accept from
Nolte equipment that has a fair value of $1,450,000, an original cost of $2,400,000, and
accumulated depreciation of $1,150,000. Piper also forgives the accrued interest, extends the
maturity date to December 31, 2021, reduces the face amount of the note to $1,250,000, and
reduces the interest rate to 6%, with interest payable at the end of each year.
Test Bank for Intermediate Accounting, Seventeenth Edition
14 – 28
*103. Nolte should recognize a gain or loss on the transfer of the equipment of
a. $0.
b. $200,000 gain.
c. $300,000 gain.
d. $950,000 loss.
On December 31, 2018, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is a
$3,000,000 note with $300,000 accrued interest payable to Piper, Inc. Piper agrees to accept from
Nolte equipment that has a fair value of $1,450,000, an original cost of $2,400,000, and
accumulated depreciation of $1,150,000. Piper also forgives the accrued interest, extends the
maturity date to December 31, 2021, reduces the face amount of the note to $1,250,000, and
reduces the interest rate to 6%, with interest payable at the end of each year.
*104. Nolte should recognize a gain on the partial settlement and restructure of the debt of
a. $0.
b. $75,000.
c. $275,000.
d. $375,000.
On December 31, 2018, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is a
$3,000,000 note with $300,000 accrued interest payable to Piper, Inc. Piper agrees to accept from
Nolte equipment that has a fair value of $1,450,000, an original cost of $2,400,000, and
accumulated depreciation of $1,150,000. Piper also forgives the accrued interest, extends the
maturity date to December 31, 2021, reduces the face amount of the note to $1,250,000, and
reduces the interest rate to 6%, with interest payable at the end of each year.
*105. Nolte should record interest expense for 2021 of
a. $0.
b. $75,000.
c. $150,000.
d. $225,000.
Long-Term Liabilities
14 – 29
MULTIPLE CHOICE—CPA Adapted
106. On July 1, 2021, Spear Co. issued 4,000 of its 10%, $1,000 bonds at 99 plus accrued
interest. The bonds are dated April 1, 2021 and mature on April 1, 2031. Interest is payable
semiannually on April 1 and October 1. What amount did Spear receive from the bond
issuance?
a. $4,060,000
b. $4,000,000
c. $3,960,000
d. $3,860,000
107. On January 1, 2021, Solis Co. issued its 10% bonds in the face amount of $8,000,000,
which mature on January 1, 2031. The bonds were issued for $9,080,000 to yield 8%,
resulting in bond premium of $1,080,000. Solis uses the effective-interest method of
amortizing bond premium. Interest is payable annually on December 31. At December 31,
2021, Solis’s adjusted unamortized bond premium should be
a. $1,080,000.
b. $1,006,400.
c. $972,000.
d. $812,000.
108. On July 1, 2019, Noble, Inc. issued 9% bonds in the face amount of $10,000,000, which
mature on July 1, 2025. The bonds were issued for $9,560,000 to yield 10%, resulting in a
bond discount of $440,000. Noble uses the effective-interest method of amortizing bond
discount. Interest is payable annually on June 30. At June 30, 2021, Noble’s unamortized
bond discount should be
a. $322,400.
b. $340,000.
c. $352,000.
d. $310,000.
109. On January 1, 2021, Huff Co. sold $5,000,000 of its 10% bonds for $4,426,480 to yield 12%.
Interest is payable semiannually on January 1 and July 1. What amount should Huff report
as interest expense for the six months ended June 30, 2021?
a. $221,330
b. $250,000
c. $265,589
d. $300,000
Test Bank for Intermediate Accounting, Seventeenth Edition
14 – 30
110. On January 1, 2021, Doty Co. redeemed its 15-year bonds of $7,000,000 par value for 102.
They were originally issued on January 1, 2009 at 92 with a maturity date of
January 1, 2024. Doty amortizes discounts and premiums using the straight-line method.
What amount of loss should Doty recognize on the redemption of these bonds (ignore
taxes)?
a. $252,000
b. $168,000
c. $140,000
d. $0
111. On its December 31, 2020 balance sheet, Emig Corp. reported bonds payable of
$6,000,000 The bonds had been issued at par. On January 2, 2021, Emig retired
$3,000,000 of the outstanding bonds at par plus a call premium of $70,000. What amount
should Emig report in its 2021 income statement as loss on extinguishment of debt (ignore
taxes)?
a. $0
b. $30,000
c. $35,000
d. $70,000
112. On January 1, 2016, Goll Corp. issued 3,000 of its 10%, $1,000 bonds for $3,120,000.
These bonds were to mature on January 1, 2026 but were callable at 101 any time after
December 31, 2019. Interest was payable semiannually on July 1 and January 1. On
July 1, 2021, Goll called all of the bonds and retired them. Bond premium was amortized on
a straight-line basis. Before income taxes, Goll‘s gain or loss in 2021 on this early
extinguishment of debt was
a. $90,000 gain.
b. $36,000 gain.
c. $30,000 loss.
d. $24,000 gain.
113. On June 30, 2021, Omara Co. had outstanding 8%, $8,000,000 face amount, 15-year bonds
maturing on June 30, 2031. Interest is payable on June 30 and December 31. The
unamortized balance in the bond discount account on June 30, 2021 was $360,000. On
June 30, 2021, Omara acquired all of these bonds at 94 and retired them. What net carrying
amount should be used in computing gain or loss on this early extinguishment of debt?
a. $7,920,000.
b. $7,720,000.
c. $7,640,000.
d. $7,520,000.
Long-Term Liabilities
14 – 31
114. A ten-year bond was issued in 2019 at a discount with a call provision to retire the bonds.
When the bond issuer exercised the call provision on an interest date in 2021, the carrying
amount of the bond was less than the call price. The amount of bond liability removed from
the accounts in 2021 should have equaled the
a. call price.
b. call price less unamortized discount.
c. face amount less unamortized discount.
d. face amount plus unamortized discount.
115. Paige Co. took advantage of market conditions to refund debt. This was the fourth refunding
operation carried out by Paige within the last three years. The excess of the carrying amount
of the old debt over the amount paid to extinguish it should be reported as a
a. gain, net of income taxes.
b. loss, net of income taxes.
c. part of continuing operations.
d. deferred credit to be amortized over the life of the new debt.
*116. Eddy Co. is indebted to Cole under a $1,000,000, 12%, three-year note dated
December 31, 2019. Because of Eddy’s financial difficulties developing in 2021, Eddy owed
accrued interest of $120,000 on the note at December 31, 2021. Under a troubled debt
restructuring, on December 31, 2021, Cole agreed to settle the note and accrued interest for
a tract of land having a fair value of $900,000. Eddy’s acquisition cost of the land is
$725,000. Ignoring income taxes, on its 2021 income statement Eddy should report as a
result of the troubled debt restructuring
Gain on Disposal Restructuring Gain
a. $395,000 $0
b. $275,000 $0
c. $175,000 $100,000
d. $175,000 $220,000
Multiple Choice Answers—CPA Adapted
Test Bank for Intermediate Accounting, Seventeenth Edition
14 – 32
DERIVATIONS — Computational
No. Answer Derivation
Long-Term Liabilities
14 – 33
DERIVATIONS — Computational (cont.)
No. Answer Derivation
Test Bank for Intermediate Accounting, Seventeenth Edition
14 – 34
DERIVATIONS — Computational (cont.)
No. Answer Derivation
DERIVATIONS — CPA Adapted
No. Answer Derivation